XWELL, Inc.
Q1 2016 Earnings Call Transcript

Published: 7 May 2016

[Executives:]

Andrew Perlman - CEO Anastasia Nyrkovskaya - CFO Cliff Weinstein - EVP & President, Fli Charge

[Analysts:]

[Operator:]

Thank you for joining us for today’s call. Before I turn the call over to the company, we need to advise you of the following, comments made on today’s call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current assumptions and opinions and involve a variety of known and unknown risks and uncertainties. Actual results may differ materially from those contained in or suggested by such forward-looking statements. Important factors that might cause such differences include those set forth from time-time in the company’s SEC filings, including the company’s annual report on Form 10-K for the year ended December 31, 2015 and it's updated by the company's quarterly report on Form 10Q for the quarter ended March 31, 2016 and the current and periodic reports that the company files with SEC. At this time I’d like to introduce Andrew Perlman, the Chief Executive Officer of Vringo.

[Andrew Perlman:]

Good afternoon and thank you all for taking the time to join us for an investor update and earnings call. I'd like to update our shareholders on recent events as well as provide an outlook for the future of the company. I will then open up the call for Q&A. Joining me on the call are Anastasia Nyrkovskaya, our CFO, Cliff Weinstein our Executive Vice President and President of Fli Charge and David Cohen, our Chief Legal and Intellectual Property Officer. As we announced shortly before this call Vringo will be renamed Form Holdings Corporation effective on Friday May 6, 2016 in an effort to solidify our position as a diversified holding company. Furthermore the shares of the company's common stock will commence trading under a new ticker symbol SH, when the market opens on Monday May 9, 2016. The company has effectively been operating as a holding company for some time, In fact if you were to look at the company's organizational structure and how we have deployed capital and other resources you would see a holding company with three distinct business segments. Group Mobile, Fli Charge and our IP Monetization business as well as our minority interest in infomedia all of which I will provide updates for on this call, but first I would like to discuss the name Form Holdings and where we envision the company going in the months and years to come. The name Form Holding stems directly from its definition. Form, means to bring together parts or to combine to create. The goal of Form Holdings it to identify and invest in opportunities that expand and diversify our business and to achieve consistent growth by utilizing our core competencies, by diversifying our business through acquisitions and investments we believe that we will increase our shareholders' value at the parent holding company level. About 4.5 years ago we identified an opportunity to create value by pivoting our core strategy from mobile apps to patent monetization through the merger with Innovate/Protect and the subsequent purchase of a large telecommunication infrastructure portfolio. As many of those listening to the call would recall 2012 and the years that followed were very exciting times for shareholders and management. However we believe that forces beyond our control in the face of an increasingly challenging global patent monetization landscape lead to a negative outcome in our court litigation. Looking at the unquestionable deterioration of value in the patent monetization sector as a whole helps to understand the industry landscape. When a market segment, public or private is under this kind of pressure investors are not inclined to allocate capital until it stabilizes. As a result we chose to explore other opportunities, over the past few years we've looked at hundreds of assets and businesses with the intent of diversifying a company. In May of 2015 we were introduced to group mobile and Fli Charge and completed the acquisition of both companies in October of last year. When we look back to 4.5 years ago and compared to today our company has a dramatically stronger balance sheet, a consolidated cap structure, strong corporate structure and talented key personnel. We are committed to restoring and building shareholder value today and in the years to come. As of today, our balance sheet consists of cash and short term receivables of $30 million including cash on hand of 20.5 million and accounts receivable of 9.5 million of which 8.9 million is from a recent licensing agreement which is expected to be collected in full in May. We believe that our management team has certain core competencies including an understanding of the capital markets and ability to recruit talent and experience an efficient business integration each of which reaffirms our strategy as a holding company. We believe that by utilizing and leveraging our company's core assets. We will be able to identify and execute on opportunities that will be a accretive. When looking at the M&A landscape we believe that Form is uniquely positioned to take advantage of and quickly execute on a multitude of investment opportunities. Our current deal flow pipeline is made up of a wide variety of prospects that span industries, capitalization means and structures that we will initially be sector agnostic each potential opportunity must present a strategy for growth and a path to profitability if not yet achieved. To support these efforts we have added new board members who have been supportive shareholders in the past but more importantly bring with them experience and expertise in M&A sourcing, diligence and structuring which we believe will be invaluable for the company as we continue to seek and invest in businesses we believe have superior growth characteristics. I will now provide brief update on each of our business segments beginning with group mobile. As a reminder, mobile is a provider of rugged, mobile and field use computing products serving customers worldwide. In the final weeks of 2015 and the first three months of 2016 we've made significant progress in growing Group Mobile. In 2015 Group Mobile generated a total of 5.3 million of revenue, when we acquired the company. Our goal was to grow revenue substantially in the near term. In order to measure the success of our effort to Group Mobile we look at a number of key metrics most notably sales and bookings. Bookings are the measure of the value of the orders we have taken. From an accounting perspective, a booking becomes a sale when an order is delivered to a customer. It generally takes four to eight weeks for an order to be delivered. So bookings key leading indicator of sales for four to eight weeks in the future. The sales that occurred in the first quarter of 2016 were largely generated from the bookings that we had in Q4 of 2015 which immediately followed the closing of the acquisition and coincided with the early stages of implementing organizational changes. In Q1 of 2016 Group Mobile's total sales were $1.3 million. However in March we began to see the fruits of our labor and secured $2 million of bookings in March and April combined based on these bookings and our current sales pipeline. We anticipate that revenues will grow in excess of 100% year over year. We anticipate closing a number of relatively large orders in 2016 and will update our revenue guidance at such times. Group Mobile's primary business is made up of large custom orders. With that in mind we were able to create significant growth by closing orders in partnership with key manufacturers such as explorer technologies and [indiscernible]. For instance in conjunction with Explorer we solidified an order that will consist of 600 motion by Explorer rugged tablets over a three year sales agreement with a market leader in sensor assisted surgery. The ability to close these deals was facilitated by adding talent to the sales team as well as reorganizing the team structure from the ground up. We've continued our recruitment efforts and have added quality sales personnel to improve our nationwide coverage of existing and potential customer accounts. We're also making system wide technological improvements that will help us run the business more efficiently. Supplementing or enhance technological backend will be a modernized website designed to drive commerce. We expect to launch this improved web presence before the end of Q2, 2016. We've seen an immediate return on investment from the additions to our sales team and anticipate significant sales growth as a result of these improvements. I'd now like to provide an update on Fli Charge, as a reminder to those listening Fli Charge is a wireless charging and power technology company that we acquired in Q4 of 2015 together with Group Mobile. We believe that wireless and wirefree charging is one of the biggest emerging technologies and that Fli Charge's technology is superior to that of all of its competitors. To our knowledge Fli Charge is the most powerful fastest charging, easiest to use, safest, least expensive and thus most scalable wireless charging solution on the market today. Since the acquisition or team has worked to redesign the entire product line and prepare for its launch and to begin selling to consumers next month. Following it's successful consumer electronics show where Fli Charge showcased its current partnerships and product capabilities we have received inbound interest from a multitude of companies including some of the largest tech and hardware companies in the world. Our goal is to leverage a successful consumer product launch and to show that demand for Fli Charge exists. We believe that this will have a profound effect on advancing our business development pipeline and will provide us with additional flexibility in options as we look to cultivate what we call the Fli Charge Ecosystem. I now like to give you a brief update on Infomedia, a company in which we have a minority interest. As a reminder in January of 2014 we sold our mobile platforms and partner services business to Infomedia which was and remains a leading provider of innovative solutions to engage consumers, optimize brand awareness and maximize revenue potential for mobile technology. In exchange we received an 8% equity stake in the company and a seat on its Board of Directors. At the time, Infomedia was interested in combining our research and development center with its existing operation. In order to better position the company to create a more integrated global product offering for delivery into major carriers, OEMs and enterprise partnerships. Since the transaction Infomedia has ranked as one of the 100 Private UK based tech companies with the fastest growing sales over the previous three years. I'll now touch upon our IP licensing business. As we mentioned in our year-end earnings press release on March 10, 2016 we’re in licensing conversations with numerous companies and remain focused on continuing these discussions and potentially generating additional licensing revenue from our intellectual property assets. I'm pleased with the development so far this year having generated $9.65 million in licensing revenues year-to-date. I'll now provide a snapshot of our financial position, as I mentioned previously we have cash and short term receivables of $30 million which when broken down consists of $20.5 million of cash on hand as well as $9.5 million of accounts receivable, $8.9 million of which is from a recent licensing agreement that is expected to be collected in full this month. Since the beginning of the year we had implemented cost cutting initiatives and reduced our accounts payable by 70% from $4.9 million at the end of 2015 to 1.5 million today. In March, we modified certain terms of our note as such the debt is no longer convertible into common shares. The company will repay the remaining principal on the note equal to $1.8 million On June 30, 2017. As of today we have approximately $15 million shares outstanding which equates to approximately $2 of cash and receivables per share. As we look to harvest cash flow in the future our net operating loss or NOL which is currently a $124 million will be used to shield profits if certain tax requirements are met. Our Board of Directors took a proactive step by instituting an NOL preservation plan which we announced in March to protect this legacy asset. I want to take this opportunity to thank our shareholders for their continued support and reiterate how excited we are to begin this new chapters at Form Holdings. At this time I would like to turn the call over to the operator for Q&A.

[Operator:]

[Operator Instructions]. And our first question comes from David Huff [ph]. Please state your question.

[Unidentified Analyst:]

Couple of quick questions on the IP side and then on Fli Charge side. We had the settlement with -- it's considered quarter two. Was there any litigation filed to get that resolved?

[Andrew Perlman:]

There was no litigation involved in the $8.9 million license that we recorded in the second quarter.

[Unidentified Analyst:]

Can you give me a rough idea on how long it took from I guess the initial engagement I would imagine a litigation stand still until the time when an agreement was reached? Was it six months, 12 months, 18 months?

[Andrew Perlman:]

So it was approximately six months.

[Unidentified Analyst:]

And obviously this is something that can be replicated, can you give a rough idea this might be actually tough, a rough idea how many other opportunities might be out there?

[Andrew Perlman:]

So as you know IP licensing is something that the timeframes can vary greatly and also the parties that are on the other side of license can vary greatly. It vary to a large degree. All I can say is we're actively engaged in conversations with over dozen parties all of them vary in size. Some of them are much smaller licenses, some of them should be I guess what I would categorize is lower seven figure numbers but I think it would be difficult and probably incorrect for me to set a real expectation of a time horizon for any of the individual licensing conversations that we're having. What I would say is that we are obviously able to reach a license in a relatively short period of time because the patents that we own are now proven.

[Unidentified Analyst:]

Okay, is there a longer term plan with the patents? Is it may be to move them to another entity you know and just do it as a sale so you can wipe them off the books and you don't take that amortization every single quarter or is the plan to keep licensing them and basically till you get everyone licensed?

[Andrew Perlman:]

So right now we’re our obviously of the mind of we’re in the position where we're actively engaged with a number of other parties but as a public company with shareholders we will always do what we believe creates the most value add of the asset. So if there were an opportunity for a joint venture or sale where we thought that created the most value that’s the avenue that we will take.

[Unidentified Analyst:]

I guess turning to the Fli Charge and Group Mobile, you know Fli Charge is being redesigned which I think previous announcements was quarter two, quarter three. I'm just trying to get an idea of what a successful launch would be I guess revenue wise, profits probably a little difficult at this time and we kind of what you're expecting over the near term in the next six months and long term. I guess the next 18 months. A - Cliff Weinstein Yes the product has been redesigned, we’re ramping up to manufacturing now and as Andrew stated on the call shortly ago consumers will have the ability to order the product in the month of June and we'll be announcing and hopefully making a splash on that launch. As it relates to revenue in a larger opportunity we believe that on the initial launch and somewhere inside of call it 60 to 90 days, I think a million dollars would be a solid result on top line revenue at Fli Charge and what that does for us and for the company is it shows that there is demand for this product. We obviously believe there is demand, we've been using this for a long time, we think the technology is great and then you're also mentioned superior to all if not most of the stuff that's out there in the wireless or wire free power and charging space. If we're successful on the launch and we do prove there is demand it really enables us to execute on our business development pipeline. In two ways, one is from the companies that we met and we continue to speak with very large companies from CES and those potential partnerships not just on phones or consumer electronics but larger powered devices as well as the retailing or in Big Box stores and exploring that. We've engaged in agency that represents a lot of the top tier consumer electronics companies that are household names, they actually approached us at the SEMA [ph] Show last year and we've engaged them to make that introduction and get us and facilitate getting us into retail if we choose to go down that path as well as continuing to work out the business plan, the budget for direct to consumer which is it tends to be a very profitable exercise if there's strong demand for the product. Long term, we see this technology being embedded into larger powered devices like I mentioned things like power tools, furniture in the classroom of our partnership with Bradford and the list goes on and on but we're very excited about it. The products been redesigned, manufacturing we've selected a contract manufacturer that we’re excited about. Our team just returned from China a couple of days back and everything is looking good right now for us.

[Operator:]

Our next question comes from Keith Goodman. Please state your question.

[Unidentified Analyst:]

You gave guidance of 100% year-over-year at Group Mobile which is obviously pretty good, what do you think the longer term hopes are? I mean what's the market size and what do you think over the next 24 months you could?

[Andrew Perlman:]

If we were looking 24 months in the future I think the goal should be for this to be a $50 million business 24 months out. This is a largely fragmented subset of the computing industry. In the rugged space you really have players like CDW and then once you go down from there, there are a lot of players that are at the $5 million and $10 million with no infrastructure, that's why one of the things we were discussing before and focusing on is building out the platform. I think that 24 months from now with some key personnel changes additions in sales staff and other things that we're doing as well as building the best platform out there that we should be able to get to $50 million run rate and that's the goal 24 months out. This year I think 100% year over year growth is absolutely our baseline and what we're going to try and achieve is beyond that and like we said earlier in the call to the extent that there are big chunky orders that come in and we will let the market know that that's happening and update our guidance.

[Unidentified Analyst:]

And what type of margins have you seen in that business and what do you think they will be going forward?

[Andrew Perlman:]

So historically it's been a little bit north of 15% gross margins, we think that there might be a little bit of margin compression as we ramp the revenues but once we actually are able to achieve scale we can do things like layering in other services whether it's a services for installing devices into vehicles or selling additional software and services like cloud storage services that we're seeing in the space. But historically they've been in that range, I think the goal once we get on the north side of say 20 million - 25 million will be to add those services to help boost our margins.

[Operator:]

Okay. Our next question comes from Jordon Meadow [ph]. Please state your question.

[Unidentified Analyst:]

So it seems like a great idea that you’re solidify into a holding company. Have you given thought to the Investment Company Act and any possible limitations going forward?

[Andrew Perlman:]

So basically the Investment Company Act creates very restrictive disclosure rules and rules about the way that a company can take on debt and other financing mechanisms if the bulk of its business is to own minority stakes in a bunch of different companies. That's not what we're doing. What we've done with Fli Charge and Group Mobile is something that we hope to replicate in the future but we've acquired a controlling position in operating business not a minority stake and then whether it's adding more capital or rebranding, redesign, remarketing we feel like that’s the core competency in what we’re good at. So in the model of taking control interest and not minority interest the Investment Company Act, while it's something that we've obviously spent a lot of time thinking about in formulating what we want to do on a going forward basis if we're taking control positions and companies the Investment Company Act is something that doesn't affect us.

[Operator:]

And that was the last question.

[Andrew Perlman:]

I want to take the opportunity to thank our shareholders for their continued support and reiterate how excited we are to begin this new chapter as Form Holdings.